The defence secretary will on Thursday warn the military that there is likely to be more pain for the armed forces as the Ministry of Defence struggles to cut costs and reform itself over the coming years.

In his first major speech, Philip Hammond is expected to say that "eliminating the black hole in the defence budget is the only way to sustain military capability over the long term."

"If we don't reshape now we won't be in a position to order new equipment in the future," he will say. "Our challenge is to move from the fantasy budgets of the past to firm foundations for the future. This is a transition that is essential to the future of defence – but no-one should be under any illusion that it will be easy or pain-free."

Hammond will be speaking at the Royal United Services Institute thinktank seven weeks after he succeeded Liam Fox as defence secretary. He is not expected to change the course of radical reform set by Fox, who pushed through last year's Strategic Defence and Security Review (SDSR) and endorsed a sweeping redundancy programme that will see up to 60,000 civilian and military posts being axed.

Like Fox, he will blame the previous government for the MoD's financial predicament. "Labour ministers were ordering equipment they had no money for and forced the military to live a hand to mouth existence. As the budget spiralled out of control, and as the room for manoeuvre on individual projects was constrained by contractual arrangements, decisions were increasingly taken on the basis of in-year cash management not on military priority."

Hammond will say he will not allow the MoD to "remove critical skills and capabilities that are irrecoverable … we will not carelessly throw away core competencies that may be essential to our defence in the future. But let's be under no illusions. Unpicking the SDSR piece by piece is simply not an option."

Hammond will claim that the final cost of the Libya operation will be £212m – less than Treasury estimates made earlier this year. Some experts have, however, cast doubt on the official sums. In his own study, the defence analyst Francis Tusa has claimed the government's figures are heroic underestimates.

Speaking at the defence select committee on Wednesday, Hammond said he was attempting to look in detail at all the major decisions made by Fox. He acknowledged that he hadn't had time to look at them all – including the costly decision to change the design of one of the Royal Navy's new aircraft carriers to take the US-made Joint Strike Fighters.

He also stepped in to defuse a row between veterans of the second world war Arctic convoys and the junior defence minister Andrew Robathan.

Some of the veterans were enraged when Robathan seemed to dismiss their claims for a separate military medal recognising their services.

In a debate on Tuesday at Westminster Hall, Robathan appeared to say the UK didn't want to become like authoritarian regimes which "often throw medals around".

He said: "Medals in the UK mean something, and we pay tribute to the people in the public gallery who are showing the medals that they won through risk and rigour. Authoritarian regimes and dictators, such as Gaddafi and Saddam Hussein, often throw medals around. North Korean generals are covered with medal ribbons. We have traditionally taken the view in this country … that medals will be awarded only for campaigns that show risk and rigour."

When he was challenged about the remarks, he apologised, but that did not stop some veterans calling for him to be sacked.

Hammond told the committee that he "deeply regretted" any offence that had been caused.

"I don't think he meant to cause offence. It was an unfortunate juxtaposition. These are people that performed with incredible bravery. If any offence has been caused then I deeply regret that. I am sure that the parliamentary under-secretary deeply regrets it as well."